The Stress Test Brings Stress to Investors

D-Day is today as we wait for the results of the bank stress tests. There have been a number of leaks about the results but nobody knows for sure how much money needs to be raised by some of the weaker banks in the group of nineteen. It appears that between six and nine banks will need to raise additional common equity or convert an equivalent amount of preferred into common or execute asset sales to deleverage. We will know all the facts soon but this is clearly the first step towards forcing the financial industry to delever.

The markets have been grasping onto all the rumors and leaks as stocks continue to rise. We foresee many more issues ahead for the banks but perhaps investors view these problems to be fully discounted. Only time will tell but the toxic assets are still toxic, the commercial real estate loans are still heading for default, the consumer loans are not being paid back, and the housing crisis is not over.

The ADP employment number brought a pleasant surprise to stocks yesterday but will tomorrow's actual employment numbers match those results? If not, stocks could sell off aggressively. Cisco reported its results last night and although their customers are seeing some stabilization, growth is not expected for the next two quarters. Visibility is still limited and the end of the recession is not in sight. Perhaps rising oil prices is a better gage of impending economic activity. Clearly, many of the cyclical stocks continue to rise. The overall market is a compilation of many individual companies and the discounting of all the economic tea leaves. It seems hard to believe that this rally is a true discounting of all this information but it more likely appears to be driven by short covering and the concern by money managers, with lots of cash, missing the next bull run. We like to see rising stocks but we continue to raise cash and put on hedges to protect the downside. If bull markets climb on walls of worry, perhaps it is a bull market but we will remain on the cautious side.